29 September 2006
Annual budgets, monitored monthly, are inappropriate in many fast-moving parts of the public sector. They could learn from the 'flexible business management' approach recently adopted by the IDA
The Improvement and Development Agency operates in a fast-paced, rapidly changing world, as does every local government body these days. To reflect this, we have adopted a new approach to financial management, which involves a great deal more autonomy for budget holders and also has a lot to offer to other public sector bodies.
Under traditional finance regimes, the budget is set annually and monitored monthly. But, in truth, many business activities simply do not conform to a yearly cycle.
The IDA, for example, might receive money from the government to undertake a specific piece of work. At the same time, a project that has been allocated funding might turn out not to be needed at all.
The agency's 2006/07 business plan and budget illustrates the point. This was signed off in January, but by April the budget had increased by £8m. In essence, by the time the business plan came into effect it was already out of date.
For that reason, we have decided to drop traditional budgeting and introduce a new approach known generically as flexible business management. This is invaluable for organisations that continually have to adapt and refine their plans to respond to changing circumstances, allowing them to stay on top of the latest budgetary demands.
This model can be applied to any organisation or service with changing work programmes that cannot be fully defined at the outset. Examples include the development of a group of services across a partnership, or a major change programme across a collection of support services.
The first aspect of the new regime is the updating of the business plan at set points through the year, most likely in September and December. This will allow plans and targets to be revised as work progresses, while still providing staff with the certainty they need.
This in turn means that resources can be moved around and reallocated according to current needs. Under traditional budgeting, money arrives at the beginning of the year and at the end there is either an overspend or an underspend.
But these days, because the financial environment changes so quickly and reactions have to be so rapid, traditional notions of overspending and underspending no longer apply.
With flexible financial management, the message to budget-holders is that if you do not have the resources you need you will get them, but any unnecessary surplus in your area will be directed elsewhere.
The second important aspect of the new regime is cash-limited budgeting.
Previously, a hypothetical IDA service might have had a gross budget of £9m. It would have been expected to raise £8m through fees and been given £1m of grant. But this method imposes a rigidity that in reality was not terribly helpful.
From now on, we will simply say to the budget holder: 'You have a cash limit of £1m. What you spend and what you earn around that is up to you.'
The deal made with managers is that they must deliver their targets and stay within the cash limit. They will be held to account for the outcomes they are expected to secure, but not necessarily the staffing budget, income budget or programme budget.
It is a more grown-up way of managing resources and will actually strengthen rather than diminish accountability.
These changes within the agency will enable it to respond more quickly to the needs of its customers, just as local authorities must respond to theirs.
They will allow us to identify at regular intervals services where the demand has increased or reduced or where the needs have changed, so we can move resources and modify performance targets to match these changed priorities.
Managers will have the freedom to act promptly, change budgets and draw in expertise quickly. They will have the flexibility to draw in the right staff with the right skills at the right time — making the IDA more 'permeable', in the jargon.
The notion of a fixed staffing budget, where there are a fixed number of posts at particular grades, all working a traditional nine-to-five day, is becoming out of date for a public sector that is expected to be increasingly user-focused.
As is the case with any organisation, the IDA cannot provide a perfect service to everyone, and local government is very diverse. But an adaptable approach to finance and business planning allows us to respond better to that diversity.
Our budget is small — about £48m gross — so we need to make the best of it. Flexible business management allows us to get the most out of our money by keeping pace with our environment. It could help your organisation do the same.
Caroline Mikardo is the director of resources at the Improvement and Development Agency
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